What the new share scheme savings limits mean for employers

In December 2013, the government announced plans to increase the savings limits for employee share schemes from April 2014.

If you read nothing else, read this…

Investment limits for sharesave schemes and share incentive plans will increase on 6 April 2014.

To implement the new limits, employers should check if their scheme’s rules need changing.

If an employer’s scheme’s rules are not linked to any change in legislation, it will need to make a formal change to raise investment limits.

The savings limit for shareshave schemes will double from £250 to £500 a month, and the maximum value of shares an employee can acquire with tax advantages through share incentive plans (Sips) will rise by £300 a year to £1,800 for partnership shares and to £3,600 a year for free shares.

The new limits provide an extra incentive for employees to benefit directly from their employer’s success and increase their tax-free savings.

Mirit Ehrenstein, professional support lawyer of employee incentives at Linklaters, says: “It is a good thing for employees to revel in the success of their employer. Employees can now save so much more each month in a tax-efficient manner.”

This is the first rise in share investment limits since 1991 and Ehrenstein says doubling the sharesave allowance is a generous move by the government. The increases follow extensive lobbying by the share plan market.

Ashley Price, head of Yorkshire Building Society’s (YBS) Share Plans (YBSSP), says: “These significant increases are a very positive move by the government.”

Implementing the changes

As the changes come into effect, many employers may look to raise the investment limits in their existing share plan schemes .

Stephen Chater, share plans director at employee ownership lawy firm Postlethwaite, says most employers will need to start by checking if their current schemes’ rules need to be changed.

“In most circumstances, they shouldn’t need to be altered,” he says. “Employers will have rules in place that state that the maximum contributions are set at a certain number, or a level prescribed by legislation.”

But if an employer has a fixed investment limit, such as the £250 a month set for sharesave schemes, and the rules of its scheme are not linked to any new legislation , then it will need to make a formal change to its share plan rules. “The change will probably then need to go through certain procedures, such as a board resolution, so that the change can be made,” says Chater.

Phil Ainsley, managing director of employee savings at Equniti, says some employers might look to increase their limit, but not up to the new maximum. “Organisations will look at the new limits in the light of their own rules, as well as their strategy for share plans and cost,” he says. “It might be the case that some employers will increase their limit, but not to £500.”

Communicating changes

Nick Throp, co-founder of communication consultancy Like Minds, says that when implementing any changes, employers need to communicate effectively with staff about what is happening.

“It would be ideal for an organisation to communicate the new limits and explain why it wants its staff to participate,” he says. “I think what works best is having employees’ testimonials about what they have done with the savings they have earned from being in a share scheme.”

Staff need to know all the basic information about a share plan, such as how much it will cost them, adds Throp. “Employees need to know how much it is going to cost them per month, how long they will be paying and what happens if the shares go down in price,” he says.

Although the changes come into effect on 6 April, employers can defer implementation of these, says Equiniti’s Ainsley. “Most share schemes are launched in the spring or autumn,” he explains. “Employers could defer to get the maximum value for employees that have chosen to go up to the maximum limit.”

Encourage saving

Although the new limits will encourage employees to save more and could persuade more employers to launch a share scheme, the changes have been criticised for enabling highly paid staff to save more tax-free, says Linklater’s Ehrenstein.

“I can’t help feeling that it will benefit those that don’t need it,” she says. “Those that are very highly paid will get more of a tax-efficient investment. But those employees that can afford it and are hitting the limits, and their employer then raises the limits, they may well be tempted to save more.”

Andrew Pendleton : How will employees respond to share plan changes?

The government’s move to double the sharesave monthly savings limit from £250 to £500 follows several years of campaigning by organisations such as IFS Proshare and share plan administrators, but who is likely to take advantage of the new limits?

Recent research by Andrew Robinson, a professor in accounting and finance at the University of Leeds, and myself, in collaboration with YBS Share Plans, part of Yorkshire Building Society (YBSSP), provides some answers. Financial behaviour and decision making by participants in share plans , a survey presented at the IFS Proshare conference in October 2013, found that, of more than 4,500 employees participating in sharesave plans administered by YBSSP, 28% are saving at the current limit of £250 a month.

Nearly 90% of these employees indicated they would be willing to save more if the sharesave limit was increased.

The main objection to raising the sharesave limit is that it will mainly benefit higher earners. It is true that the proportion of employees saving at the current maximum of £250 rises with income, but it is not just higher earners who will benefit from the increase in the limits.

In the survey, more than 20% of those earning £20,000 to £25,000 a year save the full amount allowed under current sharesave limits, and nearly 30% of those saving at the £250 limit make no other regular savings.

One important influence on whether individuals choose to increase the amount they save in sharesave is likely to be their work colleagues. The survey provides strong evidence that the amount sharesave participants save each month is highly correlated with the proportion of their friends at work that are members of the plan, even after controlling for important factors such as income.

Employees are more likely to seek information and advice on sharesave from their work colleagues than either their employer or their family and friends. It is clear that peer effects are an important influence on sharesave behaviour, and employers should take this on board when they communicate the changes to sharesave and share incentive plans .

Andrew Pendleton is professor of human resources management at the University of York

In July 2013, staff shared £61.7 million under parent organisation Walmart’s three-year sharesave scheme, with payouts to individual employees ranging from £3,000 to more than £15,000.

Sarah Lawson, shares and fleet manager at Asda, says: “The sharesave scheme is one of our most popular benefits. The take-up has increased year-on-year.”

The scheme saw its highest take-up in 2013, when more than 34,000 employees took part. To help boost take-up and clarify details about saving through sharesave, Asda takes pains to communicate the scheme to employees . This year it has focused on answering key questions from staff, such as whether the scheme is for everyone, and whether employees can get their savings back.

“We focused on trying to make communications clear,” says Lawson. “We [send] invitations, which go out to each employee with certain information about when they can join the scheme, and we also have a guide that goes out to our people managers and general store managers explaining how the scheme works.”

Although the new, higher investment limits come into force on 6 April 2014, Asda is looking to implement these from 2015 to allow more time to prepare.

“We are looking at the feasibility of it for our organisation,” says Lawson. “We are also looking at the number of employees currently paying in the maximum, what we think employees’ mentality is about wanting to save up to £500 a month, and we are getting advice from our legal teams and contacts about the administration and the rules.

“We won’t be able to do it for this year, but we are looking at it for 2015.”

I am 62 nearly , and was thinking of retiring because of health issues , but I am 2 years nearly into my 5 year plan , will I only get the money I have put in the plan back or can I by some shares or carry on with the plan paying from my bank account.